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Tax Breaks are not the answer...

5/23/2000

The federal government should be wary of calls, backed by provincial premiers and other groups, for special tax breaks and new forms of financial aid for Canada's order-starved shipbuilders.

This sector is certainly depressed. Employment has fallen to 3,500 from 12,000 in the early 1990s. Despite a well-trained workforce, generally competitive labour costs and substantial investments in advanced technology, exports have dropped to 11% of output compared with 50% two decades ago. Nonetheless, preferential treatment would be counterproductive and would breed continuing dependency on government support.

The government should, however, press more aggressively for wider access to export markets, particularly the heavily protected U.S. market. It's there that our niche-vessel sales opportunities would be substantial if trade rules were liberalized.

Opening up this market will be difficult. The U.S. Congress has shown little inclination to change the 1920 Merchant Marine Act provisions that require cargo shipped between U.S. ports to be carried in vessels that are U.S.-owned, built, crewed and flagged. Commonly known as the Jones Act, this legislation effectively shuts our shipbuilders out of the U.S. market.

Still, there's a fresh opportunity to tackle the market access issue in the World Trade Organization's new round of negotiations on trade in services. Marine transport will be on the agenda eventually. Pierre Pettigrew, Canada's Trade Minister, has promised a strong stand on behalf of our marine industry.

Many business groups in the U.S. also want the restrictions dismantled. The Jones Act Reform Coalition says they keep marine transportation costs in the U.S. higher than otherwise, by up to 25%.

Curiously, the measures are exempt from the North American Free Trade Agreement. Our negotiators screwed up big time on this, and the issue needs reopening. Repeal of the Jones Act should be the goal, or at least an amendment that exempts Canadian-built vessels and also opens up repair work to our shipyards. U.S. domestic-fleet ships must now be serviced and repaired pretty well exclusively by U.S. firms. Canadian yards can do this work only in emergencies, and even this is limited.

Our hands aren't clean either, though. We impose a 25% tariff on the import of non-NAFTA ships. Canadian government vessels must be replaced and repaired in Canada. Yet, by contrast to the United States, the Canadian market is fairly wide open. We have cabotage provisions, but it's easy for U.S.-built ships to get registration to operate in our waters.

The U.S. government claims it no longer subsidizes its shipbuilders directly. But preferential financing includes government-guaranteed loans at attractive rates that can cover up to 87.5% of construction costs and be amortized over 25 years. Through the Export Development Corp., our government is also in the financing game. But EDC support is limited to 80% of the cost, an eight-year term and OECD guideline rates of around 8%.

The European Union allows 10-year financing at three percentage points below going market rates. Some Asian shipyards are reportedly selling vessels below cost. Ironically, a Chinese shipyard is building two freighters for Canada Steamship Lines, a company owned by Paul Martin, our Finance Minister.

The Shipbuilding Association of Canada estimates direct European construction subsidies at 4.5% to 9%, and those in Asia at up to 30%. Irving Shipbuilding Inc. of Saint John, N.B. says European countries are trying to compete with Asian yards through additional subsidies and special financial-aid packages. Spain and Germany have increased shipbuilding subsidies. Norway has introduced a new subsidy for fishing vessels, Britain for ship repairs.

In terms of tonnage on order, Canada's share of the international market in recent years has been minuscule, less than half of 1%, compared with Japan and South Korea at 40% each, Europe 10% and the United States 1%. Countries such as Norway, Spain and Britain, with similar-sized yards, are going after the same market niches as our shipbuilders rather than the very large tankers and bulk carriers built by the Japanese and South Koreans.

The Canadian Committee on Shipbuilding & Policy, an ad hoc group, wants John Manley, the Industry Minister, to hold a national summit on the industry's future. In a joint submission, the Shipbuilding Association of Canada and Marine Workers Federation have asked the government to come up with an improved export-financing and loan-guarantee program that's on par with the United States. They also want a new refundable tax credit, higher Canadian content provisions and increased government investment in Canadian Coast Guard equipment and other marine infrastructure. They would retain all of our present protectionist measures and special investment incentives, and say we should introduce our own Jones Act provisions if the United States doesn't give an exemption.

Some kind of public forum on our shipbuilding industry's problems could help put these issues in perspective. But the solution lies in negotiating an end to market-access barriers and to all forms of subsidies. It does not lie in getting into a subsidy-and-financing fight with other governments.